EU pledges support as pressure builds on Republic
The Republic of Ireland has admitted that it faces a "very serious" rise in its borrowing costs, as European Union partners pledged solidarity and rumours spread around markets that it was on the brink of seeking a rescue package from Brussels.
Irish 10-year bond yields soared yesterday to 9.26 per cent, the highest figure for any member state's debt since the inception of the single currency in 1999. Before subsiding, the Irish "risk premium" thus exceeded that of Greece before her own near-fatal crisis and bailout earlier this year. The Irish government hopes that it will be able to survive the storm until a further set of austerity measures is announced on 7 December. The incipient crisis sent the euro and European stock markets lower.
In a frank admission of the grave situation, the Irish Finance Minister Brian Lenihan agreed that "the bond spreads are very serious and there is international concern throughout the eurozone about that". At the G20 summit in Seoul, David Cameron, Angela Merkel and Nicolas Sarkozy pledged to support the Irish, though the British would not contribute financially.
The President of the European Commission, Jose Manuel Barroso, declared: "What is important to know is that we have all the necessary instruments in place now to support Ireland if necessary. In case of need, the EU is ready to support Ireland. We are monitoring the situation closely."
Jean-Claude Juncker, Luxembourg's Finance Minister and chair of the eurozone ministers added: "If Ireland needs help, Ireland will get help. Up until now, Ireland hasn't asked for help from the European Financial Stability Fund." Mr Juncker confirmed that Ireland's predicament had been discussed with his counterparts.
The Irish crisis has a number of wider implications. As indicated by the movement in the euro it again raises the possibility of "contagion" – that financial difficulties in one of the weaker economies could spread again to others, such as Portugal and Spain, as happened over the past year.
Another round of austerity and protests might even threaten the stability of the government; the Irish Prime Minister Brian Cowen has become extremely unpopular.
The Irish plight also adds to fears that the UK's deficit reduction programme might similarly backfire, as a squeeze on the economy pushes unemployment higher, depresses tax revenues and adds to the banks' losses. Further losses at Anglo-Irish Bank and a subsequent bailout this year pushed the Irish deficit to 31 per cent of GDP, about three times the level of Greece's deficit. However, the Irish government denied that it needed immediate assistance or had asked for EU or IMF funds.
"Ireland is fully funded into the middle of 2011," the Finance Ministry said. "There is no application for emergency funding from the European Union."
The German Chancellor, Angela Merkel, helped make the crisis worse by suggesting that "there my be a contradiction between the interests of the financial world and the political world", hinting that she supported holders of Irish government debt undergoing some loss of capital in the event of a restructuring and bailout.
Having faced fury from her electorate after the Greek rescue, she added: "We cannot keep explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot for those risks". EU officials later denied that holders of Irish government debt would have to take a "haircut" on their investments.
A Reuters poll of economists and bond strategists also ratcheted up the pressure on Dublin, showing that 20 out of 30 respondents thought it was unlikely that the country would make it through the end of 2011 without external assistance.